Multiplying regulatory complexity

As the weeks roll by and both the March 31 and April 30 deadlines fade into history, thousands of brokers will be left with the decision of which network to join before October 31.

Whether they have decided to become an appointed representative or have simply left it too late to apply for direct authorisation is immaterial – if they want to continue writing mortgage business after October 31 they will have to join a network.

Since the beginning of the year we have seen the various mortgage magazines produce a steady stream of supplements containing lists of networks. But, Network Strategy aside – to be published on May 4 – these have been little more than a bunch of advertisements cobbled together with little introductory material or guidance on how a choose a network. It will not be easy for brokers to select a network but it is vitally important that they are at least clear about the choices open to them.

By way of background, a principal firm is a firm which is authorised by the FSA and which takes on appointed representatives. The principal firm is responsible for the actions of its ARs including advice given to clients and compliance with the sales procedures defined by the FSA – in particular the documentation that has to be handed out to clients at various stages of the sales process.

When a principal firm takes on more than 25 ARs it is classified as a network by the FSA. You are likely to see a cocktail of references to principals and networks but in effect they are the same thing.

The first question in most brokers&#39 minds is – do I have to get into bed with one network only or am I free to join as many as I like?

Here the FSA rules are clear: you can only join one network for mainstream mortgages and one network for lifetime mortgages although you can join any number of networks for access to insurance products.

But joining a number of networks only adds to your administrative burden. Do you really want a constant stream of compliance officers from the networks walking through your front door, checking the records in your filing cabinet and the like? And we are not just talking about compliance checking but other issues such as ongoing training.

Despite the superficial attractions of being able to cherry-pick among the networks most brokers would surely prefer a monogamous relationship with one network that is able to provide them with the best of all worlds – best proc fees, best insurance commissions, best training and so on.

This is the one-stop solution to which all networks aspire. To achieve this solution – or at least the appearance of being a one-stop shop – some networks have set up third party arrangements with organisation such as the insurance clubs as well as buying in mortgage sourcing software.

When it comes to choice of extra networks it is important to understand that the broker does not have a free hand in the matter – the networks themselves can dictate whether or not they will allow their ARs to join other networks.

The FSA says that this must be clearly laid out in the written contract that must exist between a network and its ARs, with the network giving explicit permission for its AR to join another network.

FSA rules state that a multiple principal agreement must be set up between each pair of principal firms when an AR is allowed to join more than one principal. See the box for the FSA&#39s prescriptive guide to the multiple principal agreement.

If more than two principals are involved the FSA will allow a single written agreement to which all the principals subscribe. This presents a number of questions. Which network drafts the agreement and who will have the time and patience to make sure it is agreed and signed by all the networks involved?

But the kiss of death for the multiple principal scenario could be the FSA&#39s requirement that there must be a lead principal in relation to complaints handling. Where a client has been given advice by an AR who has two principals and that advice could have led to a transaction being arranged with either principal, the client will know that he may pursue his complaint with one (lead) principal.

Super. Who pays the arbitration award handed down by the Financial Ombudsman Service?

The FSA&#39s interest is firmly focussed on the client – it is essentially saying that the client must know how to complain and have a clear line of communication when making a complaint even when it is not clear which principal is responsible. The FSA acknowledges that multiple principal agreements were the most controversial of all its proposals in CP159.

Simply by scratching the surface of the potential problems as we have done here leads to some obvious questions. Does any broker of sound mind want more than one principal? Does any principal firm really want to enter into multiple principal agreements?

A number of multiple principal situations will no doubt arise, possibly through special circumstances, although I suspect the number of principals involved will be small. In practice a number of networks have already made it quite clear that they will not allow their ARs to join other networks. Prominent among these are Sesame and Mortgage Intelligence.

From the broker&#39s perspective, an effective ban on joining more than one network will make the decision process that much easier. The process will boil down to deciding which single network offers the best one-stop solution.

Although this is easier said than done, it avoids the problems that lie in wait for the broker who would prefer to join more than one network.

He must ensure that the first network he joins will allow him to join another network and that the second network is also amenable to the broker staying with the first network as well as joining the second.

He is then faced with two sets of compliance procedures, training and competence regimes, and more. This just doesn&#39t make sense.

How FSA defines multi-principal deals

 Scope of appointment

 Complaints handling: identity of lead principal and arrangements for complaints handling